Testing for the cartel in OPEC: non-cooperative collusion or just non-cooperative?

Abstract

This paper extends the framework of Green and Porter (1984) and Porter (1983a) to nest the case of a cartel (OPEC) faced by a competitive fringe (non-OPEC oil producers). Estimation of a simultaneous equation switching regression model allows us to examine which market structure better characterizes the world oil market during the 1974-2004 period and to test whether switches between collusive and noncooperative behavior occurred. The null hypothesis that no switch occurred is rejected in favor of the alternative that both cooperative and non-cooperative behavior was observed. We …nd that, although there were periods in which oil prices were measurably higher due to collusion among OPEC members, overall OPEC has not been e¤ective in systematically raising prices above Cournot competition levels. Our results suggest that, on average over the period of study, OPEC's behavior is best described as Cournot competition in the face of a competitive fringe constituted by non-OPEC producers.JEL Classi…cation: D4, L11.

Forty Years of Oil Price Fluctuations: Why the Price of Oil May Still Surprise Us

“…Indeed, this is the first time in its history (and the only time) that OPEC took a proactive role in trying to influence the price of oil (also see Almoguera, Douglas, and Herrera 2011). 4 When OPEC agreements to jointly restrict oil production in an effort to prop up the price of oil proved ineffective, with many OPEC members cheating on OPEC agreements, as predicted by the economic theory of cartels (for example, Green and Porter 1984), Saudi Arabia decided to stabilize the price of oil on its own by reducing Saudi oil production.…”

Forty Years of Oil Price Fluctuations: Why the Price of Oil May Still Surprise Us

“…Cairns and Calfucura (2012) conclude that OPEC has never been a functioning cartel. For further discussion also see Almoguera et al (2011), andColgan (2014). 8 For a detailed discussion of how these policies were implemented see Skeet (1988).…”

Monetary Policy Responses to Oil Price Fluctuations

“…A number of recent DSGE studies have imposed more structure on the supply side of the crude oil market, often focusing on models of imperfect competition (see, for example, Nakov and Pescatori, 2010a, b;Balke, Brown, and Yu¨cel, 2010;Nakov and Nun˜o, 2011). Finding direct empirical evidence in favor of such models is difficult, given the paucity of relevant data (see, for example, Smith, 2005;Almoguera, Douglas, and Herrera, 2011). Although it is not difficult to design elaborate models of endogenous oil production decisions, without reliable data on reserves, exploration, drilling, and other investment activities that could be used to pin down the parameters of this process, it is difficult to estimate the parameters of such models reliably.…”